Sarkozy, Merkel call for new E.U. treaty

Correction: An earlier version of this story misstated the number of nations placed on credit watch Monday by Standard & Poor’s rating service. The story has been corrected.

ByEdward Cody

December 5, 2011

PARIS — Under growing pressure from nervous financial markets, the leaders of France and Germany reached a difficult compromise agreement Monday to seek mandatory limits on budget deficits among debt-laden European governments.

Their accord, which requires rewriting a major European Union treaty, was designed to eliminate the leading cause of doubt about European financial health and respond to a barrage of questions about whether the continent’s common currency, the euro, can endure.

If adopted by other nations in the union, the deal would mean drastic cuts in European budgets. It would also spell the end of three decades of overspending that helped finance a cozy social protection system envied by much of the world.

Underlining the high stakes, Standard & Poor’s announced in New York that 15 nations using the euro are being placed on a credit watch, risking a downgrade in their creditworthiness rating because of failure to rein in the crisis. The rating agency made the decision despite the accord Monday, signaling doubt that the new measures will be implemented fast enough to calm fears about heavy government debt.

Although France and Germany represent the core of the European Union, it is far from certain that the rest of the group’s 27 nations will go along at a crucial European summit scheduled for Thursday in Brussels. The deal could face significant opposition from those reluctant to surrender national sovereignty over fiscal policy.

Riding on the E.U. decision is not only the economic health of European nations, but also the damage that economists fear would be caused in the United States and around the globe if the euro collapses and the European Union begins ripping apart.

The proposed rules, a hard-fought compromise between French President Nicolas Sarkozy and German Chancellor Angela Merkel, would be part of a renegotiated E.U. treaty that is to be completed by mid-March and ratified within two months, the two leaders said. The attempt to impose such a tight timetable was designed to show the financial markets that Europe is serious about bringing its debt problem under control once and for all.

“This package of measures is a proof of our absolute determination to guarantee a stable euro,” Merkel said at a joint news conference with Sarkozy in Paris.

The Franco-German accord is to be outlined in a letter to E.U. leaders Wednesday and voted on at the special summit conference the next day, making this a make-or-break week for the ideal of European unity. Sarkozy said the hope is that all 27 E.U. nations will adhere to the plan. But he said it could also move forward with consensus from only the 17 countries that have adopted the euro as their common currency.

The 17-nation euro zone includes Greece, Italy, Spain and France — nations that are having the hardest time selling their bonds because of fears that they will be unable to repay what they owe.

The swift schedule for the treaty change is unheard of in the history of the European Union, which is notorious for slow-moving bureaucracy and endless bickering among governments at all-night conferences at the union’s Brussels headquarters.

“We don’t have time,” Sarkozy said, standing next to Merkel. “We are aware of the responsibility that sits on our shoulders.”

The deficit limits — a “golden rule” of 3 percent of gross domestic product — would be enforced by elected leaders of the European Community acting with a supermajority of 85 percent, according to explanations provided by Sarkozy and Merkel at the news conference. The E.U. leaders would rule on any government cited as overspending by the European Court of Justice, they added.

Nicolas Veron, an economic analyst at the Bruegel Institute in Brussels, said Sarkozy and Merkel should be congratulated for overcoming their differences and outlining the proposals to their fellow E.U. leaders. But he cautioned that the two nations, despite their preponderant influence, could not provide “the final word” because other E.U. governments might object.

In a suggestion of the debate still to come, British Prime Minister David Cameron said he did not intend to “pass any powers from Britain to Brussels.” He noted that if the treaty changes suggested by Sarkozy and Merkel require such a transfer, he would have to call a national referendum to approve them.

The schedule outlined by Sarkozy and Merkel, although regarded as warp speed by E.U. standards, seemed likely to fall short of the immediate reassurances demanded by the banks and other financial institutions whose judgments set the rate for bond issues. Even nations that adopt the “golden rule” would probably find it difficult in practice to quickly reduce their deficits to 3 percent of GDP after years of spending far more than they take in.

In the meantime, French officials have made it clear that they are counting on help from the European Central Bank, and some have dropped hints that the institution is moving to buy government bond issues.

The ECB has refused to become a lender of last resort, citing its founding rules in previous E.U. treaties. But its new president, Mario Draghi, hinted recently that the bank could be more flexible if European nations adopt genuine fiscal responsibility — that is, if they reduce their debts.

Merkel has steadfastly opposed allowing the ECB to buy up questionable European debts, saying the bank is legally barred from doing so. Asked about the French hopes, Sarkozy refused to comment, saying he and Merkel agreed not to talk about that subject.

In any case, Sarkozy said, European bonds were not going to be part of the solution. Merkel and her coalition partners in Berlin have strongly opposed the idea of “euro bonds,” in which European countries would pool funds to buy debt from deficit-heavy governments. Effectively, Germany would be financing the debts of spendthrift states.

Because it did not cross any German red lines and came out generally as expected, the accord announced Monday in Paris generated little response in Berlin. The German and French Socialist parties condemned the accord as a recipe for austerity. The French Socialists, in campaign mode for presidential elections in the spring, accused Sarkozy of caving to Merkel.

Whether Sarkozy or Merkel came out ahead, the agreement represented a compromise after months of meetings and maneuvers. Merkel had sought to have an E.U. body — the European Court of Justice or the European Commission — decide who is violating the deficit rules and mete out sanctions. But Sarkozy insisted that in European democracies, such decisions could be made only by elected leaders.

In describing their compromise, the two leaders did not make clear what kind of sanctions they envision. Other officials have talked about fines. Sarkozy made it clear that the court would have no powers beyond pointing out the violations.

“The court cannot annul national budgets,” he said. “This is not permitted.”

Similar limits have been imposed in previous E.U. agreements. But countries — including France and Germany — have routinely violated them.

Correspondents Anthony Faiola in London and Michael Birnbaum in Berlin contributed to this report.